Climate Regulation and Policies

The Carbon Footprint of Final Demand: Evolving Methods and Insights from Environmentally Extended Input–Output Analysis

Environmentally Extended Input–Output (EEIO) analysis has become a cornerstone of climate research and policy design. Rooted in national accounting traditions and originally developed to quantify intersectoral dependencies, input–output analysis was paired with environmental data as early as the late 1960s. EEIO gained momentum with the adoption of greenhouse gas reporting obligations under the United Nations Framework Convention on Climate Change (UNFCCC). While this framework represented a major advance in climate governance, its territorial nature neglects emissions embedded in trade. This raised concerns about fairness between countries that “export” and “import” emissions, and about the risk of offshoring undermining global mitigation efforts. EEIO provides insights into producer value chains while also allowing upstream emissions to be collapsed into final demand. This consumption-based perspective, which EEIO uniquely enables, complements the production-based view of territorial accounting and supports more balanced debates on fairness and mitigation in a globalised economy

This note reviews the intellectual and methodological evolution of EEIO models, with particular attention to their application to final demand.

The first part introduces territorial, production-based, and consumption-based emissions accounting and their respective responsibility frames. It situates EEIO in the national accounting tradition and explains how it operationalises consumption-based accounting while enriching production-based perspectives. Early applications extended single-country input–output tables with environmental data, followed by the emergence of domestic EEIO databases and, later, multi-regional and global tables built by harmonising national accounts. Over time, scholars, private initiatives, and national and international statistical bodies refined these databases to cover more countries, sectors, and products, expanding the scope of analysis. Against this methodological background, the note also reviews global territorial inventories, which show that greenhouse gas emissions in 2019 arose primarily from energy supply (34%), industry (24%), Agriculture, Forestry and Other Land Use (22%), transport (15%), and buildings (c. 6%). While emissions from developed countries have markedly declined since 1990, these reductions have been more than offset by rising emissions in developing countries, most notably China.

The second part focuses on the emissions footprint of final demand under standard consumption-based accounting, identifying the relative importance of household consumption, capital formation, and government consumption. It highlights how empirical insights have depended on advances in EEIO datasets, with the demand for more precise policy-relevant evidence in turn spurring refinements in database coverage, granularity, and consistency. This co-evolution of research and data has been central to the field.  Although considerable progress has been made, the review notes that database development remains an area for continued investment to support robust research and policy applications, and also acknowledges the methodological limits of mainstream EEIO models. Nevertheless, the section explains that consumption-based accounting has allowed fairness and equity to be reframed in climate negotiations by showing that the most developed countries are net importers of emissions. The section also reviews research on the three main components of final demand in detail, highlighting disparities across contexts and the mitigation potential of each, as well as the opportunities that arise when these levers are considered together.

This new policy note reviews how Environmentally Extended Input-Output (EEIO) analysis has transformed our understanding of carbon footprints. It shows how EEIO traces emissions across supply chains and allocates them to final demand. The note synthesises insights from studies of household consumption, investment, and government spending as key drivers of final demand, and highlights emissions mitigation levers in developed and developing countries, and across income groups. It also discusses methods to reallocate capital investment emissions to consumption, showing how they affect country-level footprints and generate new sectoral insights to inform fairer and more effective climate strategies. 

Rebuilding Trust in Net-Zero Targets - Five Structural Shifts in the SBTi Draft Corporate Net-Zero Standard and What They Could Deliver

The Science Based Targets initiative (SBTi) has become the leading global standard-setter for corporate climate action.

More than 7,500 companies—representing a majority of global stock market capitalisation—have had near-term emissions reduction targets validated by the SBTi. These typically span 5–10 years and align with pathways consistent with the Paris Agreement. Over 1,600 companies have taken a further step by adopting targets under the more demanding SBTi Corporate Net-Zero Standard.

As concerns have mounted over the credibility, integrity, and effectiveness of climate pledges—and in the wake of a governance crisis—the SBTi has released a draft update to its Net-Zero Standard aimed at closing loopholes, clarifying controversial issues, and strengthening oversight.

This briefing examines five major structural shifts proposed in the draft and explores how these changes could help reinforce target integrity, increase corporate accountability, and more effectively link net-zero ambitions with real-world emissions reductions.

The Science Based Targets initiative (SBTi) has become the leading global standard-setter for corporate climate action. More than 7,500 companies—representing a majority of global stock market capitalisation—have had near-term emissions reduction targets validated by the SBTi. These typically span 5–10 years and align with pat...EDHEC Research Insights supplement to Investment & Pensions Europe (IPE)

The EDHEC Climate Institute follows the long-standing research tradition of EDHEC Business School and represents a collective effort to address the pressing challenges of climate change by promoting interdisciplinary research with a more integrated vision, drawing on historical expertise in climate finance while leveraging new complementary fields to produce concrete insights and applications. 

On the trail of the EDHEC-Risk Institute and the EDHEC-Risk Climate Impact Institute, the recently formed EDHEC Climate Institute addresses the diversity of climate change-related issues such as evaluating the financial implications of climate change on equity valuation, assigning probabilities to climate scenarios, integrating high-resolution climate data, assessing decarbonisation and resilience technologies, and discussing transition finance, which is a main driver for climate transition. 

While climate finance often emphasises transition risk, initial work from Riccardo Rebonato highlights the critical importance of physical climate risk, which may have an even greater impact on financial markets. The research shows how physical damage impacts equity valuations under different policy and climate scenarios, revealing potential market mispricing. It underscores the need to better incorporate physical risks into financial models, as current valuations may miss their true economic effects. 

Climate risk assessments often use separate scenarios that focus on extreme transition risk or severe physical risk, neglecting the probabilistic interplay between these outcomes. The study by Riccardo Rebonato proposes methods to attach probabilities of various emission abatement scenarios, integrating technological, fiscal, and policy feasibility into the analysis. This research also highlights a low probability of achieving the Paris Agreement target and the need for a more realistic alignment between economic recommendations and policy action. 

Hurricanes devastate coastal cities, droughts cripple agricultural plains and wildfires ravage forests. Climate change impacts are localised, yet global averages fail to reflect these disparities. Climate risk assessments must take advantage of granular spatial data surpassing their complexity and inherent computational challenges. Such data enables precise identification of geo-sectorial vulnerabilities, allowing cities and businesses to allocate resources, develop targeted adaptation strategies and build resilience. This is what Nicolas Schneider explores in his work on how advances in data and modelling are transforming climate risk management, ensuring investors are equipped to account for localised risks and grasp the true economic cost of adaptation. 

On the latter, understanding the technologies behind resilience and decarbonisation measures is a game changer. Ambitious goals and net-zero pledges dominate the conversation but remain vague or lack actionable pathways. Focusing on the technological possibilities allows one to move beyond abstract commitments. This is illustrated by the infraTech 2050 initiative, which is a science-driven approach offering systematic evaluation of technologies and strategies for decarbonising and strengthening resilience of 101 infrastructure asset subclasses with granular information. The article by Conor Hubert, Rob Arnold and Nishtha Manocha illustrates this with a concrete example on data infrastructure, a critical backbone for modern economies. 

The successful adoption of resilience and decarbonisation technologies depends on effective regulatory mechanisms. Therefore, transition finance is critical to decarbonisation. In this issue, Frédéric Ducoulombier assesses the role given to transition finance in the EU Sustainable Finance Framework and highlights the gaps and flaws that hinder transition investment. He then draws on industry best practices and recent regulatory developments to propose key areas for reform aimed at improving transition finance integration.

This special issue of EDHEC Research Insights introduces the newly established EDHEC Climate Institute (ECI), which builds on EDHEC’s legacy in climate finance to address the broader and increasingly urgent challenges of climate change. Through interdisciplinary research, ECI explores critical topics such as physical and transition risks, probabilistic climate scenario modelling, spatially detailed risk assessments, and the technological and regulatory pathways for decarbonisation and resilience. Articles in this issue showcase innovative approaches—from quantifying equity impacts of physical damage to evaluating infrastructure technologies—while also critiquing and suggesting improvements to current EU transition finance frameworks.

Scope for Divergence - A review of the importance of value chain emissions, the state of disclosure, estimation and modelling issues, and recommendations for companies, investors, and standard setters

This policy report offers comprehensive insights into accounting for greenhouse gas emissions throughout companies’ value chains, and the challenges this process poses to companies and investors. Regulators are caught up in the contentious debate between investors and environmental NGOs who favour disclosure and business organisations and politicians representing fossil fuel interests who oppose it.

The European Union requires the construction of its climate benchmarks to be steered by value chain emissions and has mandated corporate reporting of these emissions when material; across the Atlantic, opponents of disclosures argue that accounting is unfeasible or too costly for corporates and that it will produce inaccurate estimates with limited practical value or significance, notably for investors. Yet somehow, the EU’s requirements are being met, and without any of opponents’ doom mongering coming to fruition, suggesting that their claims are largely mythical in nature.

As a significant majority of the global population supports action against climate change, investors are intent on better understanding the climate change impact and risks of investee companies. Direct and purchased energy emissions (Scope 1 and 2) have historically been the focus of reporting standards. However, the report finds that the indirect emissions that occur throughout companies’ value chains (Scope 3) typically account for the bulk of their carbon footprints.

 

Key findings:

• Value chain emissions represent a material source of emissions that companies can strategically manage in order to address both their impact on climate change and their exposure to transition risks.
• Quantitative progress in voluntary reporting of value chain emissions has not been accompanied by an improvement in the quality of the data provided. Reporting is too often an exercise in greenwashing and remains sparse, incomplete, and insufficiently focused on material sources. 
• Opposing mandatory reporting based on these limitations confuses the symptom for the cause. Mandatory reporting and assurance will materially improve the availability and reliability of reported data.
• However current reporting standards are not intended to support cross-corporate comparisons and reported data will remain irrelevant to certain usages sought by investors.
• Scope 3 emissions modelled by data providers may address issues of completeness and comparability but come with challenges of model stability and insufficient consideration of corporate specificities, drawbacks which also limit potential investor usages.

This policy report offers comprehensive insights into accounting for greenhouse gas emissions throughout companies’ value chains, and the challenges this process poses to companies and investors. Regulators are caught up in the contentious debate between investors and environmental NGOs who favour disclosure and business organisation...EDHEC-Risk Climate Impact Institute’s Response to the European Supervisory Authorities’ Call for Evidence on Greenwashing

The demand for investments integrating Environmental, Social, and Governance (ESG) dimensions has increased significantly in the past decade and the assets that financial intermediaries claim to manage responsibly and sustainably have close to trebled, reportedly growing to represent a third of overall assets under management. 

However, the industry-accepted definition of sustainable and responsible investing is nothing if not inclusive (Ducoulombier, 2023). As incorporating ESG issues into investment management now suffices to claim the responsible investment badge, the industry welcomes a dazzling array of strategies with heterogeneous objectives, potential sustainability contributions, and methodologies. Furthermore, there remains considerable disagreement in respect of basic terminology across jurisdictions, voluntary standard setting bodies, and industry associations.

Regulation of sustainability claims and appropriate disclosures would be required to protect investors against disorienting and misleading claims and facilitate matching of investment products with sustainability preferences. Beyond investor protection, such regulation could accompany the integration of sustainability concerns by businesses through better capital allocation and stewardship.

For more than five years, the European Union has led the development of such regulation. In the wake of the sustainability and development commitments taken by the international community in 2015, the European Commission set to work on a sustainable finance masterplan. Published in March 2018, its Action Plan on Financing Sustainable Growth aimed to reorient capital flows towards sustainable investment, manage financial risks stemming from environmental challenges and social issues, and foster long-termism in economic activity.

Implementation followed swiftly with the European Union putting in place three major elements of a sustainable financial framework, i.e., a classification of sustainable activities (“Taxonomy Regulation”), a sustainability disclosure framework for non-financial and financial companies (respectively the “Corporate Sustainability Reporting Directive” a.k.a. CSRD and “Sustainable Finance Disclosure Regulation” a.k.a. SFDR), and investment tools, including climate benchmarks, a green bond standard, and specific expectations and disclosures for financial products promoting environmental or social characteristics or with sustainable investment as objective (SFDR Article 8 and 9 products, respectively).

In a 2021 update to its sustainable finance strategy, the European Commission represented that greenwashing, defined as “the use of marketing to portray an organisation’s products, activities or policies as environmentally friendly when they are not”, could not only generate reputational risks for those involved, but may also “trigger a loss of trust in sustainable finance products and the financial system.” 

The Commission asserted that the legislator had established a sufficient framework of definitions, disclosures, and tools to adequately inform investment decisions. It emphasised the importance of shifting focus towards supervision and enforcement to protect investors and consumers against “unsubstantiated sustainability claims.” In this respect, it announced it would assess and review the powers, capabilities, and obligations of competent authorities to ensure they are fit for the purpose of combatting greenwashing (a practice for which the legislator to this date has yet to provide a generally applicable and binding definition).

2022 saw the International Organisation of Securities Commissions (whose 130 member jurisdictions regulate over 95% of the world’s securities markets) elevate the fight against greenwashing risk as a priority for regulators and policymakers. A record number of greenwashing allegations were recorded in a year that also saw the first greenwashing-related enforcement actions against financial institutions in several key jurisdictions. 

In May 2022, the European Commission approached the authorities supervising the bloc’s financial sector for advice on greenwashing in the financial sector and its associated risks; supervision and enforcement; and possible adjustments to the regulatory framework – initial findings were expected after a year and final conclusions ordered for May 2024.

To inform their work the European Supervisory Authorities (ESAs) sought input from stakeholders, including through a Call for Evidence (CfE) to which EDHEC-Risk Climate Impact Institute responded in early 2023. 

The demand for investments integrating Environmental, Social, and Governance (ESG) dimensions has increased significantly in the past decade and the assets that financial intermediaries claim to manage responsibly and sustainably have close to trebled, reportedly growing to represent a third of overall assets under management.  However,...